CHAPTER 19 CORPORATIONS: DISTRIBUTIONS NOT IN COMPLETE LIQUIDATION

1. At the time of her death, Janice owned (in terms of the value of the stock outstanding) the following stock: 18% of Dove Corporation and 21% of Hawk Corporation. The value of these stocks is included in Janice’s gross estate. For purposes of applying the 35% of the value of adjusted gross estate requirement under § 303 (i.e., redemption to pay death taxes), the Dove and Hawk stocks are aggregated.

a. True

b. False

2. Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of $460,000. Grackle will recognize a gain of $210,000 as a result of the distribution.

a. True

b. False

3. At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding, the corporation distributed $300,000 to redeem 400 shares of its stock. The transaction qualified as a disproportionate redemption for the shareholder. Blackbird’s E & P is reduced by $300,000 as a result of the distribution.

a. True

b. False

ANSWER: False

4. Tan Corporation paid interest expense on a debt incurred in financing a redemption of its stock. The interest expense is not deductible since it was incurred in connection with a stock redemption.

a. True

b. False

5. The tax treatment of corporate distributions at the shareholder level does not depend on:

a. The character of the property being distributed.

b. The earnings and profits of the corporation.

c. The basis of stock in the hands of the shareholder.

d. Whether the distributed property is received by an individual or a corporation.

e. None of the above.

6. Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year.

Federal income taxes paid	$110,000
Net operating loss carryforward deducted currently	70,000
Gain recognized this year on an installment sale from a prior year	44,000
Depreciation deducted on tax return (ADS depreciation would have been $10,000)	40,000
Interest income on Iowa state bonds	8,000
Rose Corporation’s current E & P is:
a. $254,000.
b. $214,000.
c. $194,000.
d. $104,000.
e. None of the above.

7. Tern Corporation, a cash basis taxpayer, has taxable income of $500,000 for the current year. Tern elected $100,000 of § 179 expense. It also had a related party loss of $20,000 and a realized (not recognized) gain from an involuntary conversion of $75,000. It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000. Tern’s current E & P is:

a. $400,000.

b. $410,000.

c. $320,000.

d. $475,000.

e. None of the above.

8. Silver Corporation, a calendar year taxpayer, has taxable income of $550,000. Among its transactions for the year are the following:

Collection of proceeds from insurance policy on life of corporate

officer (in excess of cash surrender value) $82,500

Realized gain (not recognized) on an involuntary conversion 11,000

Nondeductible fines and penalties 44,000

Disregarding any provision for Federal income taxes, Silver Corporation’s current E & P is:

a. $500,500.

b. $588,500.

c. $599,500.

d. $687,500.

e. None of the above.

9. Which of the following statements is incorrectwith respect to determining current E & P?

a. All tax-exempt income should be added back to taxable income.

b. Dividends received deductions should be added back to taxable income.

c. Charitable contributions in excess of the 10% of taxable income limit should be subtracted from taxable income.

d. Federal income tax refunds should be added back to taxable income.

e. None of the above statements are incorrect.

10.Aaron and Michele, equal shareholders in Cavalier Corporation, receive $25,000 each in distributions on December 31 of the current year. During the current year, Cavalier sold an appreciated asset for $60,000 (basis of $15,000). Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year, with interest payable at a rate of 6 percent. Before considering the effect of the asset sale, Cavalier’s current year E & P is $40,000 and it has no accumulated E & P. How much of Aaron’s distribution will be taxed as a dividend?

a. $0.

b. $20,000.

c. $25,000.

d. $42,500.

e. None of the above.

11.Tracy and Lance, equal shareholders in Macaw Corporation, receive $600,000 each in distributions on December 31 of the current year. Macaw’s current year taxable income is $1 million and it has no accumulated E & P. Last year, Macaw sold an appreciated asset for $1,200,000 (basis of $400,000). Payment for one-half of the sale of the asset was made this year. How much of Tracy’s distribution will be taxed as a dividend?

a. $0.

b. $300,000.

c. $500,000.

d. $600,000.

e. None of the above.

12.Falcon Corporation ended its first year of operations with taxable income of $250,000. At the time of Falcon’s formation, it incurred $50,000 of organizational expenses. In calculating its taxable income for the year, Falcon claimed an $8,000 deduction for the organizational expenses. What is Falcon’s current E & P?

a. $200,000.

b. $208,000.

c. $250,000.

d. $258,000.

e. None of the above.

13.During the current year, Hawk Corporation sold equipment for $600,000 (adjusted basis of $360,000). The equipment was purchased a few years ago for $760,000 and $400,000 in MACRS deductions have been claimed. ADS depreciation would have been $300,000. As a result of the sale, the adjustment to taxable income needed to determine current E & P is:

a. No adjustment is required.

b. Subtract $100,000.

c. Add $100,000.

d. Add $80,000.

e. None of the above.

14.On January 2, 2014, Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years. Section 179 was not elected. MACRS depreciation properly claimed on the asset, including depreciation in the year of sale, totaled $79,605. The equipment was sold on July 1, 2015, for $290,000. As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:

a. No adjustment is required.

b. Decrease $49,605.

c. Increase $49,605.

d. Decrease $79,605.

e. None of the above.